“Nothing in life is as important as you think it is when you are thinking about it.” A confusing yet very relevant statement written by Daniel Kahneman in his book Thinking, Fast and Slow. After reading this line thrice the words start making sense and the statement is comprehended by the mind as an apt description of human behavior. One would think that what does this have to do with Economics? Answering your question, where on one hand economics looks at all people as rational individuals; behavioral economics questions and answers the effect of psychological, cognitive, emotional, cultural and social factors on this very rationality of humans.
Emergence of Heuristics
Heuristics is a concept of behavioral economics that affects our daily life more than you can expect. The word heuristics is derived from the Ancient Greek verb heuriskein, which means ‘to find out’ or ‘to discover.’ Not going into the very depth of how 17th century philosophers and mathematicians like Gottfried Wilhelm Leibniz were looking for algorithms for solving wide ranging problems using a universal language, we come to the 1950s when Nobel-prize winning psychologist Herbert Simon suggested how cognitive limitations influence the rational human’s decision making process.
However the breakthrough began in the 1970s when psychologists Amos Tversky and Daniel Kahneman presented their research on the cognitive biases and proposed how these biases affect how people think and take decisions. This ultimately explained the concept of heuristics as ‘mental shortcuts’ or ‘rule of thumb’. Heuristics reduces the complexity of a problem by using only a part of the available information or searching only a subset of all possible solutions aiding short-term decision making. Heuristics might not give the best solution but it provides us with a quick and optimal solution, for example, if we like a politician we are more likely to believe whatever he says with passing time and not check the facts.
There are various nudges in our daily life which are very subtle in their presence but very effective influencers and they are widely used by sales, marketing and advertising platforms as well as political parties. One such significant example is of Nazi Germany where in the 1980s voting ballots for the Austrian Union had YES written in a much larger size than NO giving it much more importance visibly and biasing people towards it. It seems like a minute detail but the Austrian Union actually came to win that year.
Early Theories Surrounding Heuristics
Adaptive Toolbox, a study introduced by Gerd Gigerenzer and his research group in 2001 analysed the situations under which heuristics can be successful and proposed that people choose from a toolbox of simple strategies for this result. This was a study of domain specific, fast and frugal heuristics. In a rational world where more information is always considered as an advantage, optimization theories weigh costs against benefits and seminal theories look at heuristics as a trade off between accuracy and effort. Although an interesting angle put forward in this context was the ‘less is more’ effect which justifies the simplicity of heuristics i.e. less information might just lead to more accuracy
The concept of Attribute Substitution proposed by Daniel Kahneman and Shane Frederick in 2002 comes into play when a judgment of a target attribute that is computationally complex needs to be made and instead a more easily calculated heuristic attribute is substituted in its place very intuitively. One very presently familiar example in this domain is ‘stereotype’, judging someone’s intelligence requires more computational effort than judging them by their race or skin and although the world is unlearning these biases when they intuitively come across them they believe that they have made an honest judgement.
The Cognitive Experiential Self-Theory developed by Seymour Epstein in 2008 is a dual process system of perception that compares rational-experiential system with the intuitive-experiential system pitting logic and deliberation against intuition and emotion depicting heuristics as an experiential, adaptive process. In a more expansive comprehension, these difference in thought processes are also indicate towards different personalities
Psychology
The human capability to understand, evaluate, interpret and analyse is called social cognition. In a state of information overload, heuristics play a major role in quickly disseminating and further evaluating the information pieces to find the most logical alternative or solution to the problem. Behavioral Economics is immensely dependent on human psychology. The way consumers perceive information and apply rational consumer choice theory is the essence of study in Behavioral Economics. When it comes to formalising economic theory we tend to, automatically, start visualising models. Branching the heuristic models into two, we have;
-Informal heuristic models
-Formal Models
Informal Models
Affect Heuristic - it is the one where people make decisions based on their current emotional status. The relative ‘goodness’ or ‘badness’ of any aspect and the gut feeling are key indicators, at most times, that make you stick on a particular choice
Availability Heuristic - The decisions or choices based on immediate information influx is described by this heuristic. It describes our tendency to makes decisions based on easy reconciliation of information from our brain i.e, our memories and can lead to bad decision making too.
Contagion Heuristic - it follows the Law of Contagion. It leads people to avoid contact with people or objects that they view as ‘contaminated’ due to the previous contact with people/objects that are treated as ‘bad’. It involves what is called ‘magical thinking’ wherein even well-read people seek to avoid contact with certain objects/persons on the false pretext of transference of qualities.
Effort Heuristic - the objects or projects- that call for more effort are considered to be more valuable and productive and are deemed to have a positive connotation. The difference lies in the fact of earning and randomly obtaining.
Familiarity Heuristic- a mental shortcut that poses a tendency for human behavior to opt for choices based on past experiences or behavioral patterns. The biggest trait that governs this shortcut is that familiar, applied, and tested experiences will work in every situation.
Representative Heuristic - This is used when a person counts the odds in favor of or against an uncertain event. This is mainly applied when judging and evaluating the probability of happening of a particular event. People tend to rely on representativeness.
Scarcity Heuristic- this metal affiliation works on the basic concepts of ana economy, scarcity. The scarcer the object, the dearer it is. People tend to take things, those in abundance, for granted, and more or less turn a blind eye towards it. The scarce object occupies a higher place in Maslow’s Need Hierarchy.
FORMAL MODELS
Fluency Heuristic- this mental outlook entails smoother and faster comprehension and processing of a particular piece of information or a fluent word with respect to questions being considered or answered.
Similarity Heuristic-It is an adaptive strategy and is a short cut pertaining to how to make a formal judgment based on the degree of similarity of situations or prototype situations. People tend to watch movies of a similar genre 0r plot.
Fast and Frugal Trees- in the study of making decisions, a fast and frugal tree is a form of flowchart aimed at classifying an object into a category for the purpose of reaching a logically viable solution. It is easy to execute and graphics help to list out the pros and cons better.
Gaze Heuristic- is a critical behavioral element in animals, especially predators wherein they are able to process information quickly, loads of it. It is used in directing locomotion to achieve a goal using only one main variable. Catching a ball by a fielder in cricket is the most common example.
FINAL REMARKS
Judgment and decision-making heuristics make it apparent that the process of decision making is a deliberative one. Heuristics have been presented differently throughout history as maxims, proverbs, idioms, riddles, and axioms. Whenever heuristics are talked of, there is always an element of choice. People argue that heuristics use only partial information and fewer insights while guiding people in solutions and there is only limited viability in theories lying underneath. The prime justification for this argument is that the practical aspect and general recognized behavioral patterns that heuristic models can afford to prove. The majority of members of the Artificial Intelligence community employ ‘heuristic’ to refer to some device applied as an addition to some problem-solving system in expectation of performance improvement. Therefore performance improvement is a property included in the most popular usage of ‘heuristic’.
The use of ‘heuristic’ always presumes the existence of a decision mechanism and that the heuristic’s effect is to lead this mechanism down one path as opposed to another (Romanycia and Pelletier). The most important aspect to be kept in mind while understanding heuristics is that the heuristic models can lead to optimal solutions for some problems but the converse may not be necessarily true. The main advantage of using heuristics is the speed of plausibility of reaching an optimal solution but the optimum is not guaranteed. The most common heuristic is hit and trial which often leads to cognitive biases.
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